Aluminum pipes are arranged for a photograph in Tokyo, Japan. (Photographer: Tomohiro Ohsumi/Bloomberg)

The Weakest Base Metal of 2018 Is Morgan Stanley's Top Pick

(Bloomberg) -- Aluminum is Morgan Stanley’s preferred base metal, with supply reforms in China as well as higher costs and stronger demand poised to push prices higher over the second half.

The metal will average $2,114 a metric ton this year, and while prices may ease to $2,072 a ton next quarter amid continued oversupply, they’ll rise to $2,094 in the third, and reach $2,116 in the final three months, analysts including Susan Bates said in a note. Aluminum last traded at $2,081.50.

The Weakest Base Metal of 2018 Is Morgan Stanley's Top Pick

Last year’s top-performing base metal has flipped to become this year’s worst, falling last week to a three-month low amid concerns about stubbornly high supply in China even as the government presses on with a drive to limit capacity growth and combat pollution. In addition, investors have been tracking the fallout from President Donald Trump’s planned tariff on imports, with Morgan Stanley saying the impact is reflected in rising premiums in the U.S.

Although the post-winter restart of capacity in China and U.S. trade barriers are headwinds, the “price has fallen to a level that reflects this, and risks deterring necessary investment in new capacity ex-China,” the analysts wrote. Demand in China is set to recover as infrastructure construction picks up, including spending on the electricity grid, she said.

For commodities generally, the outlook is for weaker prices through the second half, the analysts wrote. While the bank raised 2018 forecasts for zinc, nickel and copper by 9 percent, 8 percent and 6 percent respectively, the forecast averages are below or in line with current prices.

©2018 Bloomberg L.P.